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Looking To The Euro For Dollar Index Cues

After we raised some concerns yesterday about a potential pattern on weekly charts price action in the Dow Jones FXCM Dollar Index (ticker: USDollar) on Monday negated our concerns and we once again find ourselves looking higher. After last weeks much needed period of consolidation around range highs the index looks set to build off this consolidation into its next extension higher. The projected initial upside target comes in the 9,950-10,050 region, with further consolidation expected in that region. Moves in the dollar index, however, have moved away from being directly related to the fortunes of the buck but rather are being dictated by the fortunes of the euro.

With the direction of the dollar index so closely tied to the fortunes of the euro and its debt crisis we will take a rare look at a euro chart. For us the most important chart at this time, and has been the most important for some time now, is the monthly chart (seen above) this longer term view clearly shows the steady downward trend of the euro coming off the record highs in 2008. The latest in a series of lower tops carved out early this year after putting in a lower low in mid-2010 is keeping the pressure on the downside. Here too there are projected downside targets, the initial target comes in at 1.3000 which we believe will be taken out soon, the more important one is the range lows posted back in 2010 just below the 1.2000 level. Should the euro be set up to move back down to these lows as the EMU continues to struggle with its debt crisis in coming months the dollar index should be very well positioned to continue rising through our initial upside target range. As such our outlook for the buck in coming months remains very bullish, only the introduction of a massive QE3 operation may mitigate this outlook as appetite for the dollar wanes.

Written by Jonathan Granby, DailyFX Research Team

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